How Will Disney+ Grow from Here?

An unprecedented marketing campaign, top-tier content, and a low price — what’s missing?

Image: Mike Raab

The day after Disney+ launched on November 12, the company made a startling announcement that 10 million users had signed up for the subscription video service. This figure shocked most industry analysts, and amounted to 17% of Netflix’s domestic subscriber base (60.6 million) and more than 33% of Hulu’s most recently announced subscriber base (28 million), all in just one day. More recent reports have suggested that the Disney+ mobile app has been downloaded more than 22 million times since launch.

While it is important to note the distinction between “sign-ups” (accounts registered for a free trial), “downloads,” (one Disney+ user can have up to 10 mobile devices), and “subscribers,” (a paid account, either from the consumer directly or a distribution partner of Disney, such as Verizon), the consensus is that Disney+ is exceeding all expectations, and has the best chance to become the media-incumbent, subscription video-on-demand rival (SVOD) to Netflix. But after years of preparation, the stockpiling of top-tier content, and an unprecedented marketing campaign, what is Disney counting on to attract the 50 to 80 million potential additional subscribers that they’re targeting who have yet to subscribe to Disney+?

Disney+ is the culmination of years of work behind the scenes at The Walt Disney Company, which reorganized the entire organization to prioritize the new streaming service, changing decades-old distribution strategies, and even acquiring another of the “big six” studios (21st Century Fox) in order to bolster its content offerings. On top of this, the company spared no expense on marketing the service and ensured that some of the most popular and culturally relevant content of the past 20 years would be available with no ads at a price of just $6.99 per month. In addition, the service’s first original series, The Mandalorian, reached the cultural zeitgeist with the adorable Baby Yoda.

So as successful as the service’s launch has been, why haven’t more people signed up for Disney+? And what will change that in the future? There are a few potential answers, with some much more likely than the others.

Awareness

At Disney’s investor day last April, the company stated its ambitions for a marketing campaign that would reach 95% of its target audience of 100 million homes. The ensuing campaign was heralded as “unprecedented,” “unmatched,” and “massive,” descriptions few would disagree with. After leveraging The Walt Disney Company’s owned and operated properties — ESPN, The Disney Channel, ABC, Disney theme parks, cruise lines, and retail stores — the company turned to paid media and distribution partnerships, including offering Verizon’s 17 million wireless subscribers a one year free trial of the service. All of this activity paid off with Disney+ ending 2019 as Google’s top trending search term in the U.S. We can presume that Disney likely achieved its goal of reaching 95 million households, but that means that while tens of millions of homes in Disney’s target audience are fully aware of the service, they still haven’t subscribed to the service. It’s unlikely that many households in the company target demographic that haven’t signed up for Disney+ yet have failed to do so because they’re unaware of the new service.

Price and value

Perhaps some of those consumers are aware of Disney+ and are interested in the content offering, but view yet another monthly video subscription as too expensive. Disney’s strategic low pricing and distribution partnerships aimed to eliminate this scenario altogether, as the company is prioritizing growing its subscriber base quickly over making as much money from each subscriber as possible (also known as ARPU, or Average Revenue Per User).

While the $6.99 per month subscription is already near the industry low (Apple TV+ is $4.99 per month, which offers a fraction of the volume of content), Disney offered a three-year subscription for less than $5 per month, a one-year free subscription for Verizon Wireless customers, a three-month free trial for new Chromebook owners, and a weeklong free trial for everyone else. Such attractive pricing and aggressive distribution partnerships should quell the cost concerns for most consumers, particularly those with children who may otherwise purchase Disney movies à la carte or take their kids to the theater. Again, it’s unlikely that the majority of Disney’s target demographic who haven’t yet subscribed have been deterred by the price.

In order to protect Disney’s family-friendly brand, the company has relegated all non-kid-friendly content that it controls to Hulu, which it also controls.

Content offering

The initial draw to consumers was twofold: 1) a deep catalog of some of the most popular movies of the past 20 years, including the Marvel Universe and new Star Wars installments; and 2) a family-friendly entertainment service featuring new and classic Disney and Pixar animated fare that isn’t available anywhere else. The marketing campaigns and user interface breaks down the service’s content into five distinct brands: Disney, Pixar, Marvel, Star Wars, and National Geographic.

It should be no surprise that 10 million households were interested in this content, whether through free trials or by paying the full $6.99 per month subscription fee. The bigger question is: what is the content that is not currently on the service that would attract new subscribers, who weren’t convinced to subscribe for the current Disney, Pixar, Marvel, Star Wars, or National Geographic content?

The current catalog suggests a significant growth issue for Disney, as it is light on adult TV content and heavy on movies. In the era of streaming, serialized “binge-worthy” shows have proven to be the most likely to draw cultural attention, as well as acquire and retain subscribers. Disney’s reliance on old films and family-friendly fare limits its potential audience, and makes it less likely that subscribers without children will sign up and remain subscribers after they watch the movies they’re interested in. Now that The Mandalorian has ended its first season, what will attract new adult subscribers?

Of course, Disney’s acquisition of 21st Century Fox in March means that it, in fact, owns a large catalog of adult content and some of the most prolific and award-winning scripted TV studios in 20th Century Fox Television, FX Productions, and Fox21 TV Studios. However, in order to protect Disney’s family-friendly brand, the company has relegated all non-kid-friendly content that it controls to Hulu, which it also has a large stake in. Hulu, which most recently reported 28 million subscribers, will become more reliant on Disney to invest in content for the service as WarnerMedia and NBCUniversal pull back their content for HBO Max and Peacock, and Netflix outbids the service for third party series like Seinfeld. To bolster Hulu’s content in an increasingly competitive streaming environment, Disney recently announced that FX will produce content for Hulu.

Image: Disney+

Disney’s biggest challenge will be managing these complementary subscription video services with different audiences between Hulu (broader content) and Disney+(family-friendly), as competitors like Netflix, Amazon Prime Video, and HBO Max have one subscription encompassing all of their nonsports content, including children’s programming. Disney is offering a bundle of Disney+, Hulu, and ESPN+ for $12.99 per month, but allowing consumers to purchase these services à la carte could turn out to be short-sighted. It’s not difficult to argue that Disney’s best long-term play may be combining Disney+, Hulu, and ESPN+ into a single service, which would likely attract more consumers in the aggregate, even if all of them don’t watch content from each platform. Unfortunately for Disney, integrating the technical infrastructures of Hulu, Disney+, and ESPN+ (content management systems, billing, etc.) is a complicated endeavor that may take years.

It’s inevitable that Disney integrates the infrastructures of its streaming services, which would help to solve the most likely reason that a U.S. consumer has not signed up for Disney+; they aren’t interested in the current content offerings.

Availability

It’s important to realize that Disney’s ultimate subscriber ambitions are on a global scale. All things considered, Disney actually has relatively low expectations for how many U.S. subscribers it will have in five years, which is around Hulu’s current subscriber base of about 30 million and somewhere below half of the current 60 million U.S. Netflix subscribers. Disney said as much during its investor day back in April: “Based on current launch plans and the magnitude and cadence of content investment, we expect Disney+ to have between 60 million and 90 million subscribers around the world by the end of fiscal 2024. And we expect over time, about one-third of our subscriber base will come from the U.S. and two-thirds will come from outside the U.S.”

Within five years, Disney only expects to have 20 to 30 million U.S. subscribers at a steady state. If you assumed that the 10 million sign-ups on day one of Disney+ converted into paying subscribers, and that all 10 million remained subscribers for five years, that would mean that Disney reached half of its five-year subscriber goal on day one. Of course, these are both completely unreasonable assumptions — many free trial users will never convert to paying subscribers, and a significant portion of one-time subscribers will cancel their memberships at some point, a process known as “churn.”

Disney is projecting 40 to 60 million international subscribers in five years, and to date Disney+ has only launched in the U.S., Canada, the Netherlands, New Zealand, and Australia. The service’s biggest growth opportunities are in the territories it hasn’t launched yet, such as the U.K, France, Germany, Italy, and Spain, which will go live on March 31, 2020.

Managing churn

While the initial demand for Disney+ is an encouraging sign for the best-positioned media company to take on tech’s interest in television and conquer the innovator’s dilemma, the most important aspect of subscription businesses is not adding new subscribers, but managing churn, or consumers who cancel their subscriptions. Rich Greenfield, a partner at Lightshed Partners summarized the biggest hurdle for Disney+ in his post, “Burn and Churn: Why are Google Searches for Canceling Disney Plus 4x Netflix?”: “… we wonder whether new users without young kids will churn at a high rate until the content offering expands.”

While Disney+ broke SVOD records out of the gate, that may be the easiest accomplishment for the nearly 100-year-old dominant entertainment company. Having a strong brand, top-tier content, and pent-up demand doesn’t excuse Disney from the two most important questions in SVOD businesses: 1) What content will attract new subscribers; 2) What content will retain those subscribers?

While streaming content isn’t a zero-sum business, as competition hits a fever pitch, it’s more important than ever to have answers to those two questions. We don’t know how Disney+ will answer yet.